Paying Off Your Chapter 13 Plan Early

From time to time I am asked the following question by a potential Chapter 13 client: If somehow I could come up with the money, could I pay my Chapter 13 plan off early? If you have ever seen a Chapter 13 plan, it is easy to understand how this question would arise. The plan document provides for monthly payments in a certain amount, and then it shows what the total of the payments over the life of the plan will be. It shows how all the money is to be applied – so much to unsecured creditors, so much to attorney fees, so much for the trustee’s fees, and certain amounts to taxes or other priority debts. Usually it will even state in terms of a percentage exactly what fraction of the unsecured debts are being paid.

It seems obvious that once the plan is approved, if the Debtor could come up somehow with the total due under the plan, he or she should be able to wrap it up early and get their discharge early.

Well, guess what. That’s not how it works. Or at least it usually is not how it works. Simply stated the rule is this: the only kind of Chapter 13 Plan that can be paid off early is a 100% plan. Chapter 13 plans fall into two categories: 100% plans and less than 100% plans. In a 100% plan, all the unsecured debt is to be paid under the plan. In a less than 100% plan, only a portion of the unsecured debt is to be paid. The vast majority of Chapter 13 plans are of the less than 100% variety.

So in most plans, where less than all of the unsecured debt is scheduled to be paid, the trustee will welcome extra payments from folks who have come into extra money that was not expected, such as an inheritance or big bonus at work. In fact the trustee might REQUIRE that such funds be paid into the plan. But after that extra payment is made, unless the plan is of the 100% variety, the regular plan payment is due again the next month – and that continues until the end of the plan or until 100% of the unsecured debts are paid, whichever comes first.

The result of all this is that in most Chapter 13 cases, it is self defeating to take draconian measures for the purpose of raising extra money to pay into the plan. Unless you can raise enough to pay off 100% of the unsecured creditors who have filed their claims with the bankruptcy court, there’s no reason to make an extra effort. In fact you might be more or less punished for any such extra efforts.

If you are in Chapter 13 and receive extra money from somewhere, consult your attorney about it right away. If the amount is significant enough you probably have an obligation to report it to the bankruptcy trustee. Sometimes your lawyer can negotiate a deal which allows you to keep some of the funds and pay in only part of it.

This post is for general information purposes only and does not create an attorney-client relationship. It is not legal advice. Seek the advice of your own attorney concerning the details of your case.

David Kelly Law Office is a debt relief agency helping people to file for relief under the federal bankruptcy code.

Comments

I have been in chapter 13 for 45 months making all payment on a 100 % repay of all unsecured debt and just sold my jeep wrangler that was paid off and I was able to make enough to pay off the finial debt of my chapter 13 are there going to be any reprocussions for me paying off a 100 % of my debt early

Mr. Bell. You may be the exception to the rule that paying extra on a Chapter 13 plan usually doesn’t usually help. If you have a 100% Chapter 13 Plan and pay it off early, you should be able to get your discharge early.

In Minnesota after the final payment is made, there is still some paper work that needs to be done before they will grant a discharge. Now is the time you should be talking with your own lawyer about getting your case wrapped up, doing whatever final paperwork is needed and getting the discharge issued. Even if the plan is paid off, you probably have a few more steps before you are entirely done.

This is for general information purposes only and is not legal advice. This does not create an attorney-client relationship. Please consult your own lawyer about the details of your case. I am a debt relief agency. I help people file for protection under the federal bankruptcy code.

I am in month 11 of a 60 month Chapter 13 with a base amount of $410,000. (Los Angeles) I would like to refinance out of it since I have the equity to do so. My question is would I be able to save on the remaining Trustee’s Fees or would I have to pay them off in full? They were very high at over $40,000. Thank you.

Although bankruptcy law is federal, there is a tremendous variation in practices and interpretations from one state to another. I don’t practice law in California, and I know that things are done quite a bit different there as compared to Minnesota. So the first thing I have to say is this: consult a lawyer from California. It would be best to not rely on anything I say. In fact, consult YOUR lawyer. You should have a lawyer who represented you in connection with filing the case. If you do not, that was your first mistake.

If you read my blog post, I say there that the only way you can pay off a Chapter 13 Plan early is to pay off 100% of all the claims that have been filed. Typically in most cases that would be a really bad deal unless you already have what we call a 100% plan, in other words a plan where you are scheduled to pay 100% of all unsecured claims.

Your question doesn’t say whether your plan is a 100% plan or not. Without that information I couldn’t answer your question even if you were from my home state of Minnesota. But since you are from California and I am not, it is not safe for me to give you any definitive answer – except to say please talk with a lawyer from your own state.

Most of my clients are good Minnesota people who would rather do anything but come and see somebody like me. They tend to keep trying to figure out how to manage their debt on their own, when they are way past due for a Chapter 7 or Chapter 13 bankruptcy. If you have between fifteen minutes and half an hour, call me (952-544-6356) and at no cost to you I can do a screening over the phone which should give us a fairly good idea of whether you should be filing a bankruptcy and whether it should be a Chapter 7 or a Chapter 13.

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I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code.

Located across I-394 from Ridgedale in Minnetonka. Serving the Minneapolis and St. Paul area, with easy access from the western suburbs including St. Louis Park, Golden Valley, New Hope, Crystal, Hopkins, Eden Prairie, Maple Grove, St. Michael, Waconia, and Plymouth. Also available by appointment only at 8421 Wayzata Blvd., second floor conference room, St. Louis Park, MN 55426.